The Process Of Factoring

Factoring is a special process through which a business can ensure a constant flow of cash without entangling itself in a loan from a bank. The relationship with a factor is unlike a relationship with a bank since the factor is purchasing debt obligations from the business and not loaning money. The process of initiating a relationship with a factor is also much simpler than securing a loan.

When a business begins a financial relationship with a factor the business is referred to as an invoice seller. This name is used because the substance of the invoice seller’s relationship with the factor is the sale of its invoices. The invoice seller and the factor initiate the process by conducting a joint review of the invoice seller’s clients and their worthiness as candidates for factoring. Only the invoices of those clients deemed acceptable risks are determined to be candidates for the factoring process.

At this juncture the invoice seller can choose to factor all of these invoices or just a portion of them. Each factor differs in its attitude toward this part of the process. Some may want to see a specific quantity of invoices factored each month. Other factors may leave it to the invoice seller to decide which invoices will be sold and how often. Sometimes the relationship allows for complete freedom on the part of the invoice seller to decide each month which invoices will be sold. This is ideal for the invoice seller who can then adjust his or her needs for factoring to a changing cash flow from clients.

Each month as the invoices are factored the invoice seller receives less than what it billed for each factored invoice. However it receives the money quickly. This celerity in payment is deemed more favorable than waiting for full payment because that could render the invoice seller unable to pay its employees. Even if the threats to the invoice seller’s cash flow are not that serious waiting on payment could still jeopardize the company’s ability to grow or adjust.

As time goes by the invoice seller can decide whether or not to continue the relationship with the factor. The advent of the internet and the increasing rapidity with which communications are conducted have allowed the parties involved to streamline this process and make the exchanges much easier to carry out. Factoring is now well entrenched as a standard business practice especially for start-up businesses that need a constant flow of money.

There is controversy surrounding the subject of factoring. Consumer advocacy groups register disturbance with the way all of this is done without even an acknowledgement of the debtors involved. Proponents of factoring point out that the rights of the debtors are not being infringed and therefore there is no need to worry. The debt remains the same. The only thing that changes is the party to which the debt is owed. This claim does not satisfy all detractors but businesses consider factoring to be crucial and they would put up a strong fight against attempts to alter this practice.